Deflation Denial

Market Trends - 19/03/2015

The most despised word of the global central banking cartel remains the evil term “deflation.” Broadly defined as a decrease in prices for a basket of goods and services over a specified period of time, it is typically indicative of economic contraction and a weak outlook. With inflationary metrics around the globe tumbling, the developed world is broadly starting to feel the pinch of price declines. There are notable exceptions to the deflationary trend, with several nations suffering from inordinately high inflation such as Venezuela (68.50%), Russia (16.70%), Brazil (7.70%), and Turkey (7.55%). Looking at any of the recent policy speeches from central bankers, remarkably absent from commentary is the word deflation itself. For instance, US Federal Reserve Chair Janet Yellen talked yesterday about persistently low inflation as a transitory factor related to the drop in energy prices even though on an annualized basis deflation has already hit, with inflation printing at -0.10% year over year. The equivalent metric in the Euro Area is -0.30% while the comparable measure from Spain is -1.10%.

The omission of the word deflation implies that Central Bankers are increasingly worried about the outlook as most central banks have eased monetary policy as far as conventional policy will allow. Now that they have run out of conventional tools, Central Bankers have resorted to the last remaining tools at their disposal, jawboning. The beauty of this measure is the cost which is nothing, however the tradeoff becomes credibility. As Jean Claude Juncker, former President of the Eurogroup famously said, “when it becomes serious, you have to lie.” Central Bankers were clearly taking note when they decided to talk about the inflationary outlook, despite how dismal it is forecast to be. SNB President Thomas Jordan followed the exact same strategy when discussing the Swiss outlook earlier today. In his discussions of interest rates and the Franc exchange rate, Jordan highlighted that inflation is forecast to print at -1.10% for 2015 and -0.50% in 2016, avoiding the word deflation entirely. As the global view deteriorates, expect this to be a much more common feature of Central Bankers as they try to avoid setting off a panic by uttering the ugly word “deflation.”


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